Archives for posts with tag: newbuilding market

Shipping is a cyclical industry and for shipyards the current trough in newbuilding orders has put further pressure on capacity. While the scale of the current surplus appears huge, this is not the first time that the shipbuilding industry has grappled with excess capacity. Looking back to the past, and specifically the shipbuilding cycle of the late 1970s, what can be learnt from previous experience?

Enjoying The Highs

The shipbuilding industry has a habit of ramping up production capacity rapidly. In 2010 shipyards broke all previous delivery records, outputting 53.2m CGT (in dwt and GT terms deliveries peaked in 2011). Compared to 2004, early into the most recent ordering boom, this was a 122% increase in deliveries. Looking back to the mid-1970s, there was a similar burst of activity as strong newbuild demand saw yard output double between 1972 and 1976 to 10.2m CGT.

What Goes Up…

As in the late 1970s, economic downturn and its impact on the shipping markets led to a significant fall in yard deliveries after their peak in 2010. The initial decrease in output was faster and sharper in the 1970s, with deliveries declining by 64% between 1976 (Year 0) and 1979 (Year 3). The current cycle has seen a more gradual fall in deliveries, declining 34% between 2010 and 2014 with 178 yards reported to have completed delivery of their orderbooks in 2012 (Year 2).

…Must Come Down

Shipyard output is still in decline. Though the surge in ordering in 2013 has helped support delivery volumes, current estimates are for an 18% fall in shipyard output in 2018. Many anticipate that the current delivery cycle will dip around 2019 (Year 9), suggesting a shorter cycle than before. It also seems unlikely that delivery levels will fall by as much as in the late 1980s, as the same pattern would imply a further 47% reduction in output from 2018 estimates to around 15m CGT.

Time To Recover?

After the 1970s crash, it took over a decade for shipbuilding output to recover. Today, following one of the weakest levels of newbuild contracting on record in 2016, the overcapacity which has characterised the global shipbuilding industry in recent years is even more prominent. While 353 shipbuilders currently have a vessel (1,000 GT or above) on order, almost half of these shipyards have failed to win a contract since the start of 2016.

If the current shipbuilding cycle were to follow the same pattern as in the 1970s, we would only be 7-8 years in, with a full recovery still some way away. However, the situation will improve if contracting levels increase. Trade growth, the replacement of older, less efficient ships and stricter environmental regulation could support yard capacity in the future through a recovery in newbuild demand.

Looking back at the shipbuilding cycle of the 1970s, it is clear that the industry has faced similar challenges in the past. It seems unlikely that we have reached the bottom of the current cycle, and pressure to remove capacity remains. Shipbuilders will be hoping that newbuild demand drivers come through quickly to stem the duration of this particular downturn.

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After a long cycle of build-up in capacity in the 2000s, shipyards hit a new peak in global output in 2010. Since then, the impact of reduced vessel ordering on shipbuilders worldwide has been a key issue for the industry, and it’s clear that global output has dropped significantly and shipyard capacity has diminished. But how far can those shipyards still active look ahead today?

Looking Forward

‘Forward cover’ is one basic indicator of the volume of work that shipyards have on order, calculated by dividing the total orderbook by the last year’s output (in CGT). Unsurprisingly, after a period of extremely low ordering in 2016, forward cover has shortened. Currently, global forward cover stands at 2.3 years having declined throughout 2016, as the orderbook shrank by 25% in CGT terms. Global forward cover was as low as 2.1 years at the start of 2013 (but delivery volumes in 2012 were 37% higher than in 2016) and peaked at 5.6 years in 2008.

Looking around the shipbuilding world, yards in Korea currently have the lowest level of cover at 1.5 years. European yards, meanwhile, bucked the trend in 2016, increasing their forward cover on the back of cruise ship orders (and falling production volumes) to 4.2 years.

Less To Go Round

Fewer fresh orders have also led to a greater number of yards ending the year without receiving a single contract. During 2005-08, the number of yards to take at least one order was on average equivalent to 87% of the number of yards active (with at least one unit on order) at the start of the year. In 2009-15, with ordering generally lower, the figure averaged 49%. In 2016 this fell further to 28%, with just 133 yards receiving an order. In China, 48 yards (26 of which were state-backed) won an order in 2016 compared to 284 yards in 2007. In Japan, 22 yards took an order in 2016 compared to 60 as recently as 2015. In Korea, 11 shipyards took an order last year.

Out Of Work?

Whilst many yards have tried to cope with the lower demand environment by slowing production or working outside their traditional product range, the statistics clearly point to huge challenges. In 2016, 117 yards delivered the final unit on their orderbook. The peak production level of these yards, many of them smaller builders, totals around 4m CGT. However, 163 yards are scheduled to deliver their current orderbook by the end of 2017 (although in reality slippage may mean some of the work runs on past the end of the year). Statistically, this represents 43% of the number of yards active at the start of the year. Although these yards have been reining back capacity and outputting less in recent years, the peak production level of this set of yards totals as much as 12m CGT. Offshore builders of course face huge pressures too, with about half of those active scheduled to deliver their final unit on order this year.

Global shipyard output and capacity have fallen significantly since the peak years. However, many remaining yards still don’t need to look too far ahead to see the end of their current workload. The shipbuilding industry will be hoping to see a return to a more active newbuilding market sooner rather than later.

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It has been well documented that newbuild orders have slowed substantially in 2015, with 857 contracts recorded at yards in the first three quarters of the year, down 45% from 2014 on an annualised basis. However, it’s also clear that builders in the big three shipbuilding countries have experienced differing fortunes. Looking beyond the aggregate trend, what has driven the divergent outcomes?

Hardened Times

In 2015 so far, the newbuilding market has seen subdued ordering activity. In the first three quarters, shipyards globally took orders equivalent to 24.3m CGT (compensated gross tonnes, a measure of shipyard ‘work’ or capacity). This compares to a total of 43.9m CGT in full year 2014. However, the big three builder countries have experienced significantly different fortunes. Chinese yards have been hit extremely hard, with new contracts in CGT terms down by 49% on an annualised basis. New contracts at Japanese yards, meanwhile, have dropped by a more moderate 14%, whilst ordering in Korea has fallen by 7%, not too bad when global contracting is down by 26%.

Exposed To A Changing Mix

What explains the difference? Many factors are at play but foremost is the ‘product mix’ – the type of units ordered. And even more so, it’s the mix in the context of the ‘exposure’ or track record that each builder nation has in the key vessel sectors. The graph illustrates ordering in selected sectors in the major builder countries alongside their ‘exposure’.

The bulker sector lies at the heart of Chinese yards’ fortunes this year. Global bulker orders of 2.6m CGT (152 units) are down by 77% on an annualised basis (to 11% of orders globally). In 2014 China took 9.2m CGT of bulker orders, but in 2015 ytd has taken only 0.5m CGT. This accounts for 8% of total Chinese orders of 6.3m CGT this year, but over the previous five years bulkers have accounted for 57% of contracting in China (and 39% of contracts globally). China’s exposure to bulkers comes at a price now that the product mix has shifted.

Anyone Well Set?

Boxships and tankers have accounted for 61% of global ordering in the ytd, and Korean builders’ exposure to these sectors (23% and 28% respectively in 2010-14) has stood them in good stead. These types have accounted for 71% of the total 8.8m CGT of contracts placed in Korea in the ytd, with the major yards more focussed on boxships and medium-sized builders on tankers. In Japan, meanwhile, product switching has helped. Japanese builders have historically been highly exposed to bulkers (64% in 2010-14, and 29% even in 2015 ytd) but an increased focus on tankers and boxships (23% and 29% in 2015 ytd respectively), and support from domestic ordering, has allowed them to plug into today’s product mix, taking  6.0m CGT of orders in the ytd.

Monitoring The Exposure

So, aggregate building trends tell part of the story but product mix developments can be critical too. As every good trader knows, understanding your exposure is important. Sometimes this can be managed, and sometimes not, but it generally explains a lot. Have a nice day.

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Analysis of vessel ownership often focuses on the major shipowning countries. This week we take a closer look to reveal the top shipowning cities, and find that even though shipping is a global industry, ownership is fairly well concentrated in a relatively small number of major centres. These include both shipping’s usual suspects as well as some perhaps less obvious locations.

Living For The City

A few weeks ago it was reported that the mayor of Copenhagen wished to rebrand the neighbouring southern Swedish region of Skane as “Greater Copenhagen”. While some inhabitants of Malmo and the surrounding area might not be too keen, the story serves to highlight the role that cities play in providing the infrastructure, access to service providers and networking opportunities that influence where businesses choose to locate.

The 20 most popular city locations for shipowners are featured in this week’s graph. It is headed, perhaps unsurprisingly, by Athens, with a fleet of 4,043 vessels of 161.5m GT. This is equivalent to 14%, or one seventh, of the current world fleet. After Athens comes Tokyo, with 98.3m GT, and Hamburg with 70.5m GT. Singapore and Hong Kong complete the top 5. Overall, nine of the top 20 cities are in Europe, eight are in Asia and three are in the Americas.

Close For Comfort

The top 20 cities account for a total fleet of 765.5m GT, almost two thirds of world capacity. The top 10 cities account for over half, and the top 5 almost 40%. Shipping is one of the most global of all industries, with mobile assets that can theoretically operate (almost) anywhere in the world. So why do shipowners choose to locate themselves in a relatively small number of cities?

Many of the top locations are major ports or large cities in key trading nations, and would seem to be natural locations for shipowners. However, not all of the cities are ports or major cargo destinations, or at least have not been for some time.

What these cities often have in common are well developed networks of owners, charterers, sources of finance and other service providers. These can act as magnets for suppliers and clients, which in turn attract competitors leading to the emergence of large shipping centres. Most of these cities have a presence across a range of vessel types, though in some cases specialisms emerge, notable examples being Hamburg (containerships) and Oslo (gas, offshore), while some are boosted by the presence of a major owner in a particular sector.

Cities Of The Future

The share of the biggest cities looks like it will be maintained by deliveries over the next few years. The top 20 cities account for 63% of tonnage on order, with 4 of the top 5 also possessing the 4 biggest orderbooks. Further down the list, London, Hamilton and Monte Carlo look set to move up the ranking, each hosting public listed shipowners active in the newbuilding market over the past few years. Locations in emerging economies also perhaps offer clues to the future. So there you have it. Everybody likes to spend time with friends, and shipowners like to keep theirs close. Have a nice day!

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